Saturday, May 3, 2014


For all the mixed messages from the Fed and the uncertainty that has roiled financial markets recently, one thing looks very clear: The era of declining interest rates is over.

After three decades in which borrowing costs for Americans have pretty much declined steadily to rock bottom levels - easing consumer debt burdens for cars, homes, and college education - the long term path of interest rates is now at a turning point, according to many economist and investors.

Regardless of the Federal Reserve's statement recently and the market's reaction to Chairman Ben Bernanke's statements at his quarterly news conference, the reality is that the flood of easy money is ebbing and the economy is shifting to a new period of rising rates.

To some extent, the rising interest rates reflect the gradually improving American economy. Although still lackluster, the 4 year old recovery has settled into a fairly steady cruising speed, growing about 2% a year. Economic growth is widely expected to pick up toward the end of the year.

The benchmark 10-year U.S. Treasury bond yield was 1.66% in early May, but by the end of the month it had vaulted to 2.16% a huge jump. Mortgage rates, which are tied to 10-year Treasury yields, have crept up as well. Long-term interest rates peaked in the early 1980s with the 10-year Treasury yield averaging nearly 14% in 1981. It has fallen most years since then, to 7% in 1992, to 4.6% in 2002 and to 1.8% last year.

Analysts disagree over whether higher mortgage rates could wind up stalling growth. In the short term, it could push potential buyers into the market to lock in rates before they rise further. Longer range, the central question is, how the economy will be performing as rates climb back to historically normal levels.

If the economy is up, and people have jobs, and profitability is high, which is what happens when the economy starts to grow rapidly, no one is going to care, I think. What'd you think? I'd love to hear your point of view, as well!

Re-posted from our newsletter originally sent on 8/6/2013